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Focus on functional drinks: Beverage boss details a category full of energy

While the term ‘functional beverages’ may not sound particularly innovative, the products in this category, namely sports drinks, energy drinks and health beverages, are anything but ordinary. On the contrary, functional beverages are showing significant growth with key economic indicators suggesting a category in great shape and full of energy.

According to IBISWorld, annual revenue growth in the five years to 2018-19 notched up 3.9 per cent which is expected to continue in the years to 2023-24 with growth estimated at 3.5 per cent per annum1. Growth of that kind would deliver a significant $155.8 million boost to revenue over the ten years to 2023-24. In 2019-20, it is anticipated that total revenue will reach $447.5 million2.

Currently, the biggest product category in functional beverages by revenue is sports drinks, contributing 54.5 per cent, followed by energy drinks at 27.3 per cent and health beverages at 18.2 per cent3. While imports have traditionally dominated the functional beverages sector, the Australian Beverages Council anticipates Australian production will increase over the next five years.

It’s clear that in functional beverages, competition is strong and healthy. Numerous product launches have occurred in the last 12 months alone, and consumers are already benefitting from new drinks, including a swathe of products that offer functionality and refreshment, and many with no added sugar. Across both this category and the broader non-alcoholic portfolio, consumers are enjoying a wider range of drinks than ever before – all of which are designed to satisfy different lifestyles and different occasions.

Many in the industry are also experimenting with beverages that provide certain health benefits, such as probiotic drinks and fruit drinks with protein and vitamins. Interestingly, it is both our time-poor lifestyles and an increase in health consciousness that are driving demand for health-related functional beverages.

Consumers are increasingly telling our member companies that they want functional beverages to meet their lifestyle needs and this is particularly acute in the sports drinks sub-category. It’s also essential that manufacturers continue to innovate in this space to ensure they not only satisfy discerning consumers, but also buoy revenue growth in a challenging consumer market.

Many manufacturers are responding to changing consumer tastes, which clearly inform what food and drinks makers do, but especially in the functional beverages space. Given that innovation is particularly swift in this segment, it’s important that the food regulatory system remains agile, which is evident with sports drinks and Food Standards Australia New Zealand’s current consideration of the definition of this category.

Manufacturers are also witnessing strong growth in reduced or no sugar energy drinks, commensurate with consumer preferences for a boost to get them through hectic days while not contributing significantly to energy intake. This trend in energy drinks is in line with the broader industry’s move towards low and no sugar drinks.

Last year, the non-alcoholic drinks industry came together in an Australian-first to announce a commitment to reduce sugar by 20 per cent by 20254 across the industry’s portfolio. Across a range of categories, and not just in functional beverages, manufacturers are reducing the sugar content of their products while offering consumers greater choice to suit any lifestyle or occasion. We’ll see more product innovation and portfolio renovation which introduce additional low and no sugar products as well as unsweetened products in the months and years ahead.

While our portfolio is evolving, we’re also interested in the activity in other markets. In the United States, for example, innovation in functional beverages is advanced. It’s clear to see that many manufacturers have seized the opportunity that has been afforded by regulatory change in that market, and we see this in new products that are infused with cannabidiol [CBD]. CBD is the second most prevalent active ingredient of cannabis, although by itself it does not cause psychoactive effects or ‘dependence potential,’ according to a report by the World Health Organization5. For manufacturers right across the US, this development heralds a new economic period in the life of the drinks business.

Zenith Global indicated recently that US sales of cannabis-based drinks were worth $86 million in 2018 and sales are likely to surpass the $1 billion barrier by 2023, jumping to around $1.4 billion by 20246. Clearly, while it is tempting to latch onto this beverage trend in a wider industry that is expected to be worth $25 billion by 20257, there are many challenges that come with developing such a product and many more associated with generating a profit from its sale.

Currently, while there is much interest in this space, Australian manufacturers face a bureaucratic obstacle course. Under the UN Single Convention on Narcotic Drugs, to which Australia is a signatory, cannabis products cannot be used for non-medicinal purposes. The permission for products using hemp seed oil is a different matter.

At least one Australian company applied to the Office of Drug Control for a licence to export CBD oil from Australia, but this was rejected. Last year the World Health Organization reported that pure CBD should not be treated as a narcotic and the UN is reviewing CBD classification under international drug treaties8, so watch this space. For the time being, however, the increasingly competitive functional beverages sector in Australia is likely to focus on new product development, particularly in health-related functional beverages to meet a sustained increase in health consciousness9.

This article was original published in Food & Drink Business, available here